What You Need to Know About Trade Secrets in 2023 (Part I)
“Secrecy is not just about the information not being generally known; in the absence of actual espionage, it is grounded on sharing in a trusted, confidential relationship.”
Trade secrets in the United States have a fascinating history, during which courts shaped the common law tort as a way to enforce confidential relationships. Now the legal framework is statutory, with some version of the Uniform Trade Secrets Act (UTSA) in effect in every state except New York, and with uniformity in the federal system thanks to the Defend Trade Secrets Act of 2016 (DTSA). Nevertheless, the law continues to evolve much as it did a century ago—that is, through the opinions of judges deciding individual cases on their facts.
What follows is a selection of those decisions, along with other resources, which have come out during the past year and which I believe provide helpful guideposts about important aspects of trade secret law and practice.
Trade Secret Case Management Judicial Guide
Inspired by the Patent Case Management Judicial Guide, some of us who worked on that volume joined with other practitioners and scholars to create the Trade Secret Case Management Judicial Guide, which has just been published by the Federal Judicial Center for distribution to all federal courts. It provides judges and counsel with a comprehensive resource for surveying trade secret law and managing trade secret litigation. Chapters are organized according to the stages of litigation and guided by an early case management checklist.
Sedona Conference Commentaries
Counsel should also consider the recent efforts of The Sedona Conference Working Group 12 on Trade Secrets, a volunteer think tank of over 200 judges, attorneys and other professionals who have produced a series of commentaries representing consensus views on various aspects of intellectual property litigation. Because courts routinely cite to the Sedona Commentaries as authoritative, they represent a valuable resource. The most recent final commentaries, issued in July 2023, are:
- Governance and Management of Trade Secrets
- Monetary Remedies in Trade Secret Litigation
- Cross-Border Discovery
Secrecy
This is where every case begins. And secrecy is not just about the information not being generally known; in the absence of actual espionage, it is grounded on sharing in a trusted, confidential relationship. Therefore, in a business transaction, even if the owner had a subjective expectation of secrecy, there can be no claim for misappropriation where the contracts show no direct confidential relationship with the defendant. Novus Group v. Prudential, 74 F.4th 424, 428 (6th Cir. 2023) (affirming summary judgment). In a similar way, a lack of attention to confidentiality can lead to loss of associated rights. In Minerva Surgical v. Hologic, 59 F.4th 1371, 1377-79 (Fed. Cir. 2023), the Federal Circuit upheld summary judgment of invalidity of a patent based on the bar of 35 U.S.C. § 102(b) that prevents patenting an invention more than a year after it was “in public use.” In this case, the inventor had taken samples of the device to display at an industry conference. Although no one was allowed to disassemble or even handle the samples, there were no confidentiality agreements in place, and so simply showing the device was enough to start the clock running.
One tricky area of trade secret jurisprudence lies in the so-called “combination secret,” which derives its value from a unique (and secret) combination of elements which themselves may be found individually in the public domain. Think of a simple food recipe, for example. Each of the ingredients may be well known, and probably are. The amount of each one may have shown up in other recipes. Ditto for the baking time and other variables. But if it can be shown that this one is “special” in the sense that you can’t find that specific combination elsewhere, then – subject to your ability to demonstrate the value, or “synergy” of the recipe (more on value below) – you may have a defensible secret. But the other requirements of the law still apply, including that the secret not be “readily ascertainable by proper means” by others. (I’ve seen people who can taste a piece of cake or a cocktail and confidently recite how to make it.) Thus, the court in DT-Trak Consulting v. Kolda, 979 N.W.2d 304, 311 (S.D. 2022) determined that no protection was available for a combination that could be “compiled by others with the general skills and knowledge” in the field.
In contrast, consider Allstate Ins. Co. v. Fougere, 79 F.4th 172, 189 (1st Cir. 2023), where the alleged secret consisted of spreadsheets containing information about thousands of customers, including email addresses, premium rates and policy renewal dates. Although they also included some otherwise accessible data, the court observed that duplication of the entire compilation would be “immensely difficult.” Summary judgment for plaintiff was affirmed.
Independent Economic Value
The UTSA and the DTSA require that protectable trade secrets “derive independent economic value” from secrecy. In their 2021 article, Abandoning Trade Secrets, 73 Stan. L. R. 1, 9, Camilla Hrdy and Mark Lemley asserted that in the litigation of trade secret cases the courts are less rigorous than they should be, “allowing plaintiffs to rely on weak inferences and assertions of hypothetical value rather than meaningful evidence.” While I don’t fully embrace the larger theme of their article that trade secrets may be declared “abandoned” if not actively used by the business owner (there’s good reason that the statutes qualify “value” as “actual or potential”), they do have a point that courts tend to accept conclusory assurances rather than demand robust evidence. Some judges have taken notice of the criticism and are trying to elevate expectations for litigants. In Health Care Facilities Partners, LLC v. Diamond, 2023 U.S. Dist. LEXIS 97611 at *30-31 (N.D. Ohio June 5, 2023), the court granted summary judgment on this issue, noting that conclusory allegations of competitive value are insufficient to establish a trade secret. The opinion quoted from Providence Title Co. v. Truly Title, Inc., 547 F.Supp. 3d 585, 610-11 (E.D. Tex. 2021):
“In a general sense, there is ‘value’ to a business in keeping all confidential business information secret; that’s the motivation for classifying such information as confidential. But just because a business benefits from keeping certain information confidential does not necessarily mean that the information has independent economic value derived from its confidentiality. Otherwise, all confidential business information would constitute a trade secret and the additional statutory requirement that the information have independent economic value would be rendered meaningless.”
What is required, the Health Care court explained, is “discrete, particularized facts” based on personal knowledge to support the conclusion of value. Stated another way, the plaintiff must provide evidence of “some objective indicia of (or rationale for)” the existence of independent economic value that derives from secrecy.
In addition to establishing a foundation that meets the requirements of the Rules of Evidence, proof of value should focus on the specifically claimed trade secrets, rather than on products that incorporate them, or more distantly the value of the company that owns them. This was the primary message of Synopsys, Inc. v. Risk Based Security, Inc., 70 F.4th 759 (4th Cir. 2023). Having been accused by RBS of misappropriation, Synopsys sought a judicial declaration that it had not misappropriated any legitimate trade secrets. Affirming the district court’s grant of summary judgment in Synopsys’ favor, the Sixth Circuit pointed out that RBS had only presented evidence of the commercial success of the company’s primary product and the price that a third party had paid to acquire the company. Even though the product embodied the trade secrets and represented 90% of its revenue, RBS had failed to provide “evidence that its seventy-five alleged trade secrets had value because they remain secret.” (emphasis in original) Under the circumstances, the plaintiff should have presented expert testimony about the competitive value of each discrete trade secret, or at least of groups of them that share the same evidence of commercial value. However, the RBS expert had not assessed the asserted secrets directly, justifying exclusion of his report.
Reasonable Efforts
Closely related to the concept of secrecy is the requirement that the trade secret owner exercise “reasonable efforts” (UTSA) or “reasonable measures” (DTSA) to protect the information. In effect, courts will not step in to help if the owner has failed to help itself with security measures that match the business risk. Occasionally the failure is so obvious that it can result in a judgment on the pleadings. For example, consider Pauwels v. Deloitte LLP, 83 F4th 171, 182 (2nd Cir. 2023), where the plaintiff consultant alleged a verbal agreement with two Deloitte partners not to disclose or use his analytic model outside of their firm. In affirming dismissal, the court found a failure to use reasonable measures because the agreement did not prevent widespread disclosure within Deloitte to people who were not bound to confidentiality.
Two other cases decided this year address whether and how the question of reasonable efforts can be addressed through experts. A challenge to testimony from a law professor was turned back in Neural Magic, Inc. v. Meta Platforms, Inc., 2023 U.S. Dist. LEXIS 37357 at *56-*57 (D. Mass. Mar. 6, 2023), because she also had experience as a consultant on reasonable measures. It did not matter that she lacked a degree in, or deep understanding of, the relevant technology because she could still provide context to help the jury understand “how certain security measures are viewed in the field.” Id. at *58-*59. And FMC Technologies, Inc. v. Murphy, 2023 Tex. App. LEXIS 5984 at *30-*31 (1st Dist. Houston Aug. 10, 2023) affirmed the trial court’s decision to allow a lawyer (ahem, that would be me) to testify in view of my separate experience in managing information security issues, emphasizing that reasonable efforts is a question of fact, id. at *53, and that analyzing the circumstances in terms of risk management was a reliable methodology. Id. at *56-*57.
In Part II of this article, we will look at cases dealing with the proper identification of trade secrets, misappropriation and cases assessing injunctions and damages.
Image Source: Deposit Photos
Author: tashatuvango
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